Resisting The Temptation Of The Brazil ETF Bounce

Shares of the iShares MSCI Brazil Capped ETF EWZ, the largest exchange traded fund tracking stocks in Latin America's largest economy, are flirting with a 2 percent gain at this writing, positioning the downtrodden ETF to close higher for a second consecutive day.

Before committing hard-earned capital to EWZ, investors ought to strongly consider if the last two days of positive price action in the ETF mark the beginnings of a legitimate, lengthy rally or if this bounce is one of the dead cat variety.

It could be a case of the latter. Prior to EWZ closing higher on Tuesday, the ETF had closed lower in eight of the previous nine sessions as glum economic news mounted. Benzinga, with credit to outside sources, noted the following earlier this week: 

It appears things could get worse before they get better for Brazil ETFs, particularly after economists ratcheted down 2015 and 2016 economic growth expectations. The glum case for this year was widely known, but lower forecasts for next year deal a blow to the theory, held by some fund managers, that 2016 would bring a rebound for Brazilian stocks.

"Brazil's gross domestic product is expected to contract 1.76% this year, compared with a contraction of 1.70% expected last week, according to a weekly central-bank survey of 100 economists. For next year, economists reduced their view for an expansion of 0.20%, versus 0.33% projected in the prior week. The forecasts for both years marked the second consecutive downward revision by economists," according to Dow Jones Newswires.

Even with two days of gains, this EWZ's tale of the tape, according to Finviz: Down 8.8 percent over the past week, down 13.8 percent over the past month, down 21.4 percent over the past six months, down 20.6 percent year-to-date and down 42.5 percent over the past year. And the ETF resides almost 17 percent below its 200-day moving average.

Oil is a problem for Brazilian equities, too.

"The tanking of oil prices in July, not counting Tuesday's rally, have certainly not helped Brazil being a producer of the commodity, and one can see the heavy correlation between oil prices and Brazilian equities not just in the past month but in the year-to-date, as well as trailing one-year periods and it has simply been a bloodbath,” said Street One Financial Vice President Paul Weisbruch in a note.

On Tuesday, Standard & Poor's revised its outlook on Brazil's sovereign credit rating to negative from stable, indicating there is a chance the ratings agency strips Brazil of its BBB- rating, the lowest investment grade, in the coming months.